A Week of 'Cool' Inflation Keeps the Fed on Hold

Two straight days of 'cool' inflation numbers... What it means for interest rates... Texas stops connecting data centers to the power grid... Tech stocks aren't the market's only winners...

Inflation may be settling down...

This week brought two key inflation numbers... the consumer price index ("CPI") and the producer price index ("PPI").

Both showed the same trend: Prices aren't going up so fast anymore.

Yesterday, the U.S. Bureau of Labor Statistics reported that the CPI rose 3.4% year over year in July and 0.1% since June. That's the second straight month of slowing CPI growth. And when you look at core CPI, which excludes energy and food prices, the annual reading of 2.5% is the lowest level since April 2021.

What really matters is the trend. The rate of inflation has now slowed for two straight months.

Today, the bureau released PPI numbers. And the story was the same. PPI came in flat month over month and rose 4.7% year over year. As with CPI, that was the second straight month of "cooling" inflation.

And core PPI rose just 4.2% year over year in July, its third straight month of slowing growth.

None of these numbers surprised investors. They're in line with Wall Street's estimates. And both CPI and PPI are still both well above the Federal Reserve's 2% inflation goal.

But the numbers tell us something valuable... The economy is starting to work off the shock from the Iran war.

And the Fed is surely noticing this trend.

The 'pause' is back on...

On Monday, I (Nick Koziol) wrote about how Friday's weaker-than-expected jobs data placed the Fed in a tough spot. From Monday's Digest...

Before Friday, traders were pricing in a 55% chance of a rate hike in September, with a 45% chance of leaving rates unchanged again. Now, traders are pricing in a 51.7% chance of rates rising, according to CME's FedWatch.

The question is whether the Fed will stay in wait-and-see mode, raise rates to combat inflation, or even lower rates to support the job market.

Well, after this week's inflation data, the market sees the Fed standing pat for a while. According to CME's FedWatch, traders are pricing in a 67% chance that the Fed leaves rates unchanged in September, and "only" a 70% chance that the Fed raises rates this year.

In other words, investors still think the Fed will raise rates. But they're less sure than they were recently, when they'd priced in more than a 90% chance of at least one rate increase. And they'd expected more than a 50% chance of two increases in 2026.

With inflation appearing to ease on its own, the Fed will feel less pressure to raise rates.

That's exactly what the market wanted to see. Stocks added to yesterday's gains, with all three major indexes rising and the S&P 500 hitting a new all-time high.

Texas takes a page out of New York's playbook...

Electricity rates are another inflation driver. Energy-hungry data centers have driven up the cost of power.

As we'll discuss, this pressure might also be starting to let up.

Texas has more planned data centers than any other state except Virginia, according to research firm Cleanview... It found 311 data-center projects in the works there.

But last week, Texas Governor Greg Abbott pumped the brakes on this growth. He ordered the Public Utility Commission of Texas and the Electric Reliability Council of Texas ("ERCOT") to "audit" all these projects.

This audit could take several months, according to ERCOT, which operates the state's power grid.

Without passing the audit, none of these data centers can connect to ERCOT's grid.

According to Abbott, the proposed data centers are seeking a huge amount of power in Texas. Here's a statement from the governor's office...

ERCOT is currently considering approximately over 474 gigawatts of requests to connect to the Texas grid, more than five times Texas' record peak electricity demand for ERCOT. Approximately 90 percent of the new power requests are data centers. That unprecedented load growth could endanger the reliability and stability of the Texas electric grid.

The audit isn't banning new data centers. But it's slowing them down. And Texas is now the second state to halt data-center activity. As we wrote in the July 15 Digest...

While several town and county governments have already placed bans on data centers, New York just became the first state to put a moratorium on data-center construction. Yesterday, New York Governor Kathy Hochul signed a law placing a one-year ban on data-center projects using more than 50 [megawatts] of energy.

Data-center construction has already taken a hit. In the first three months of 2026, $130 billion in data-center projects were canceled or postponed. That almost matched the entire value of cancellations from all of last year.

What's bad for the AI build-out could be good for folks' electric bills...

In July, the electricity component of the CPI increased 0.1% from the previous month. But it's still up more than 37% over the past five years and within touching distance of its all-time-high pace.

Data-center holdouts could take some of the bite out of electricity's impact on inflation.

That doesn't mean electricity rates will go back down. But they may not keep rising so fast.

Shortly after announcing the pause on data-center connections, Texas announced that it expects power demand to grow 5.6% in 2027. That's well below the 14% growth the state had estimated as recently as July.

So just by pausing data-center connections to the power grid, Texas has already reduced its growth in power demand by about 60%. Taking out all of that power demand will lead to a more stable grid. Utilities won't have to compete with data centers for power... And they won't have to raise rates to pay for costly grid upgrades.

More states could soon join Texas and New York – again, many smaller jurisdictions already have. The more demand pressure that these moratoriums take away from data centers, the less upward pressure electricity will put on overall inflation.

Some data centers dodge this problem...

In Texas, the governor's requirements focused on data centers that tap into the state's power grid. They don't apply to data centers with their own power plants.

Several of our Stansberry Research editors have covered this trend. For instance, here's what Gabe Marshank wrote in the February edition of Market Maven...

The relentless demand from AI is driving up wholesale [electricity] prices, and consumers aren't happy. You've probably noticed that your power bill is a lot higher than it used to be. Regulators are being asked to step in, raising the risk that they meddle with both price and availability.

We're seeing a boom in demand for power generation, but the market isn't able to respond. Large turbines for central gas facilities are in short supply. Even worse, tying those plants into the electricity grid is an incredibly time-consuming task that often takes five to seven years.

That doesn't work for the AI giants like Alphabet's (GOOGL) Google and Microsoft (MSFT), who want that electricity to fund their data centers today.

[An independent power producer] doesn't have that problem. By putting its power on-site, out of the reach of regulators, it can charge its clients whatever it wants. That means top dollar because it can provide electricity without government meddling or delay.

So even if data centers don't drive inflation by raising electricity costs... they're not necessarily going away. Big Tech's AI spending can continue.

Tech stocks aren't the only ones hitting new highs...

For the past few years, the Magnificent Seven have dominated the market. This small group of mega-cap tech stocks accounted for more than half of the S&P 500's total return from 2022 through 2024, and "only" 46% of the total return last year.

So far this year, that has shifted to other parts of the tech sector, including the ongoing boom in semiconductors and memory stocks.

But that doesn't mean other parts of the market aren't also thriving.

As our colleague Brett Eversole told subscribers in yesterday's True Wealth Systems "Review of Market Extremes"...

In a healthy bull market, lots of different stocks go up. You want to see the broad market rising, not just a few stocks pushing the index higher.

That's what makes the recent market action so promising. You see, while the AI trade took a beating, other areas of the market stepped up to fill the void.

And yes, while AI stocks are back in favor after a hiccup to end July, a few other sectors are sitting at new highs. Brett continued...

Again, the recent AI bounce is what pushed the S&P 500 to its new 52-week high. But it also pushed a combination of sectors to their own 52-week highs: industrials, healthcare, and financials. You can see the breakouts in the chart below...

This probably isn't the group you'd expect to see hitting highs during a technology boom. But these sectors are all critical to the economy.

(Paid-up True Wealth Systems subscribers and Alliance members can read Brett's full report here.)

We can also see this breadth in another way... by comparing the market-cap-weighted S&P 500, which has huge weightings in tech and AI stocks, with the index's equal-weight version. And today, both indexes made new all-time highs. That's exactly what we want to see for the bull market to continue.

As long as that breadth continues, the "rest" of the market will continue to provide support even when the AI boom has its hiccups.

New 52-week highs (as of 8/12/26): Arista Networks (ANET), Alpha Architect 1-3 Month Box Fund (BOXX), Dexcom (DXCM), iShares MSCI Japan Index Fund (EWJ), iShares MSCI Spain Fund (EWP), Franklin FTSE Japan Fund (FLJP), Cambria Foreign Shareholder Yield Fund (FYLD), Helmerich & Payne (HP), Hewlett Packard Enterprise (HPE), H&R Block (HRB), iShares Biotechnology Fund (IBB), Keyence (KYCCF), Marathon Petroleum (MPC), Cloudflare (NET), NewMarket (NEU), Palo Alto Networks (PANW), Starbucks (SBUX), USCF SummerHaven Dynamic Commodity Strategy No K-1 Fund (SDCI), State Street SPDR Portfolio S&P 500 Value Fund (SPYV), Twist Bioscience (TWST), Ternium (TX), Valero Energy (VLO), and Waters (WAT).

A quiet mailbag today... As always, send your comments and questions to feedback@stansberryresearch.com.

All the best,

Nick Koziol
Baltimore, Maryland
August 13, 2026